We all have common goal, which is to be healthy, wealthy and happy.
To achieve wealth, you work hard and prioritise saving up money over spending. You promise yourself strong commitment towards achieving financial success.
Now, imagine your journey towards financial success like gaming session. Your ultimate gaming goal is to grab the winning prize.
But, there will always be some challenges, obstacles and may be some villains come in that upset your winning journey, right?
Same goes to your journey towards financial success, there will be roadblock that can hinder your progress. The financial roadblock is your bad debt!
You can’t progress without clearing it!
Do you know debts can be categorised into bad debt and good debt? Good debt brings positive consequences, and bad debt causes negative outcome.
Bad debt is generally high in interest and it does not increase your income in long run. Example of bad debt: credit card loan
Credit card comes with double digit interest rate. Credit card debt is a bad debt, because it is used to make purchase depreciating assets (clothing, gadget, furniture) and some basic living consumable (food, detergent, petrol).
If you pay for only minimum payment, it will take you years to clear off the balance. The best way to stay away from bad debt is to avoid purchase if you can’t afford it and you do not need it.
Imagine you buy a fancy branded handbag of RM 3000 on credit card, and you cannot afford to pay off the credit card balance on time. By the time you paid off the bill after years, the amount paid could had accumulated to RM 5000 and now the handbag is out of the trend.
How about good debt?
Good debt is generally low interest loan. It is investment which will raise your income or net worth in long run. Example of good debts are education loan and mortgage.
Education Loan: Generally, one’s earning potential is positively correlated with education. You are highly likely to end up with a high paying job with better education.
Therefore, education loan is a good debt that repays soon when one enters work space. To maximise your education loan, it is advisable to pursue courses with positive career path.
If your future work pays you little or offers no career advancement, your student loans could turn sour into bad debt.
Mortgage: You need a place to stay, you can choose either rent or buy. Since you will need a place to live anyhow, it is financial wise to live at a place which gains value over time.
Generally, houses usually appreciate in value over long term, the mortgage loan that you commit is an an investment. Of course, there is up and down of market price due to supply and demand.
Therefore, it is pivotal to do thorough research before committing into property investment.
If you have bad debts, you should focus in clearing the debts before going for next step such as saving and investment.
Imagine your credit card debt is running at 20% p.a., and you are saving your money in bank fixed deposit of 3.5%, this financial decision only makes you poorer and poorer.
If you have good debts, you should not rush to clear the debts. Your free cash flow can be channelled into areas which can grow your wealth, such as investment in stocks, unit trusts as well as venturing into business. Leverage your money to make you richer and richer.
Now that you have some ideas on debt, how would you plan your next financial move?
Comment if you have any issues with debt.
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